On November 21, the Co-Chairs of the Joint Select Committee on Deficit Reduction released a statement that said, in part, “After months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline.” This concludes a dramatic period of debate among committee members on how to address the nation’s budget deficit crisis. Though there were several hints of a possible bipartisan proposal, the primary areas of contention – negotiations around entitlement reform on one hand and claims for increased tax revenues on the other – proved to be insurmountable.

With respect to the overall tax landscape, where does this leave us for the rest of 2011 and through 2012? Here are a few thoughts:

Uncertainty around expiring tax provisions:
There are a number of significant tax-related provisions, which are due to expire at the end of 2011. Reports indicate that several of these were being addressed as part of the supercommittee negotiations. Key items due to expire include:

  • Employee payroll taxes – currently at 4.2% of wages for 2011, scheduled to revert back to 6.2% in 2012
  • Certain unemployment benefits
  • The AMT exemption amount, which is scheduled to revert back to levels in place a decade ago, would result in an additional 25 million taxpayers being subject to the tax in 2012
  • 100% expensing for businesses
  • Medicare payments to doctors and other health-care providers (otherwise known as the “doc fix”) – current law calls for these payments to be reduced by roughly 30% if no legislative action occurs
  • Tax-free IRA distributions to qualified charities

Potential legislation to delay, reduce, or eliminate automatic spendings cuts mandated by the Budget Control Act of 2011
The supercommittee’s failure to reach an agreement on $1.2T in deficit reduction triggers automatic spending cuts of that same amount to occur beginning in 2013. These cuts largely exempt social programs such as Social Security, food stamps, and Medicaid, for example. There are slight spending cuts within Medicare totaling 2% derived from reduced payments to providers (not from any reductions in benefits). The bulk of the spending cuts will affect discretionary, non-defense, and defense budgets roughly equally. There are already discussions among leaders in Washington to reduce or prevent these pending cuts before they occur.

Increased rhetoric as we head toward November elections
Though legislative activity in Washington, D.C., is difficult to predict, it’s likely that no major tax-related changes involving the fate of the Bush tax cuts or the potential for comprehensive tax reform will occur before the elections. The debate around the Bush tax cuts, entitlement reform, and other tax-related issues such as the fate of popular tax deductions will be central to each party’s platform as November approaches.

In this environment of extreme, long-term tax policy uncertainty, effective planning for clients becomes increasingly challenging. Clients are well served to consult with their tax professionals now in light of historically low tax rates in 2011 and 2012, and (at least) consider some shorter-term, tactical opportunities to mitigate their tax bill.